Remortgaging out of a Help to Buy Equity Loan
The Help to Buy Equity Loan scheme was launched back in April 2013. For those of you who took the scheme out in the year it launched, the free interest period has now ended and you may find your finances are looking a whole lot different now.
In this article, we’re going to run through what the Equity Loan is, how and when the interest will be added, and what the options are for those whose free interest period is coming to an end.
How does Help to Buy Equity Loan work?
The aim of the scheme is to help first time buyers finding it difficult to get on the property ladder, or homeowners struggling to move up the property ladder. The Equity Loan is only applicable on new build properties in England and Wales (up to the value of £600,000 in England and £300,000 in Wales) and was due to end in April 2021 but has been extended to March 2023.
The scheme can be broken down into three simple parts that look like this:
1) You contribute a 5% deposit.
2) The government will lend you up to 20% of the property price (40% if you’re buying a property in London) - this is interest-free for the first five years but you do have to pay a £12 management fee per year, until you start paying back the interest.
3) The outstanding 75% is taken out as a regular mortgage (e.g. a two or five year fixed deal).
This is an attractive option for many as it means you can reap the benefits of a 25% deposit, like access to more competitive mortgage rates, when you’re really only having to fork out for a 5% deposit.
Paying back the interest
So you’re probably thinking, what’s the catch, right? Once the loan reaches its five year anniversary from the day you took it out, you will have to start paying back the interest.
- From year six onwards, the interest rate you will have to repay is 1.75%.
- The interest rate will increase every year at the Retail Price Index (RPI), plus 1%, until you have paid back the loan you initially borrowed.
Remember, the interest you have to pay back is on top of your monthly mortgage repayments, so it’s important you have the funds in place for this when the time comes as your repayments could substantially increase.
Paying back the loan
You will have to pay back the equity loan either when you sell the property or when your mortgage term comes to an end e.g. 25 years.
If you sell your house, the government will simply take the percentage amount that you owe off the sale price of your house, regardless of whether it’s higher or lower than the amount you borrowed. So, just be aware that if house prices in your area have increased, you may find you’re paying back a lot more than you borrowed.
Remortgaging out of Help to Buy Equity Loan
If you’re coming to the end of your current mortgage deal, and are therefore looking to remortgage, there are two different options on how you can approach this:
1. You can do a normal remortgage and keep the Equity Loan alongside it, as you have been doing already.
2. You can remortgage and get rid of the Equity Loan, or at least some of it (you will have to pay an admin fee of £115).
The second option does mean you’re likely to end up with a larger mortgage but you won’t be tied into the loan anymore.
Before you make this decision, we strongly recommend you speak to a mortgage adviser as you need to make sure you’re in a strong enough financial position to be able to take on the extra mortgage payment without running the risk of defaulting.
Staying put and paying off the Equity Loan
If you’re happy in your home and don’t feel the need to move then you could consider staying where you are and either paying off the loan in full or at least start paying off the interest. Paying it off in full will save you having to fork out for interest charges, but this depends on you having the funds in place to do this. If you can’t afford to buy yourself out of the Equity Loan, the government will still own a share of your house and will take their cut when you do eventually come to sell up. Therefore, bare in mind that if house prices are looking likely to increase in your area, you may want to consider buying yourself out of the loan now, before they do increase and you want to move house. As mentioned previously, this is because the government will take the percentage amount you owe off the sale price of your house, so you could end up paying more than you originally borrowed.
If you’re interested in paying back the loan, you can either pay back the whole amount in one lump sum or in smaller instalments, but you can only repay back a minimum of 10% of the property’s value. You will also need to have the remainder of the loan assessed which could cost around £200 for a valuation, as well as an additional admin fee of £200.
Moving house and paying off Equity Loan
Another option to consider, especially if you’re ready for a change anyway, or property prices have increased in your area, is to move house and pay off the loan. The Equity Loan will be repaid to the government from the sale proceeds, so you won’t have to pay anymore interest on this and you can pocket the rest of the profits you make from the sale.
Should you pay off the Help to Buy Equity Loan?
It all comes down to your own personal circumstances and your financial situation, however paying back any debts, if you can afford it, is always recommended as it saves you money in the long run.
In this particular case, the benefits of paying back the government loan includes:
1. If the property increases in value, you can take full advantage of this as you won’t have to hand any of it over to the government.
2. You don’t have to worry about paying the interest after the five year anniversary of taking out the loan.
3. When the time comes to remortgage, you will have access to a wider range of lenders with more mortgage deals, so you’re likely to find the right one for you.
Because we play by the book we want to tell you that…
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.